Waves of Unthinking Money

I’m going to talk with you about them from an Ontario and Alberta perspective. I spoke to the Calgary West Rotary Club last week, using an earlier version of this speech.

At the conclusion of my remarks, I’ll make two comments that specifically relate to Manitoba.
The three ideas are:

1. The present system of geographically based subsidies and subsidies to regions is dangerous for Ontario and Alberta but is also damaging all regions and adversely affecting most Canadians.

2. The dangerous effects are the consequences of poor policy by the federal government and a flawed concept on the part of most Ontario leaders – and to some extent by leaders in Alberta – of their responsibilities in relation to fiscal transfers to other provinces and regions.

3. Several promising directions for change are evident but great urgency is necessary if they are to be addressed and Ontario’s future secured before the lasting damage that has been done by this system becomes impossible to undo.

A. What is the interregional subsidy and transfer system?

The system is a series of planned programs and hidden spending biases that transfer funds from taxpayers from one region to others. The planned part of this includes the equalization program and a series of transfer activities geared largely to health and education.

The spending biases include provisions built into government programs that transfer funds to other regions in ways that are obscure. A good example is the transfer of several billion from Ontario to others through E.I. provisions that discriminate against Ontario’s citizens.

Another example is the cash grab by the federal government in relation to Pearson Airport. The federal government collects two thirds of the rents associated with the entire airport system from Pearson yet it handles just one third of the traffic.

I think Lester Pearson would be appalled by this.

More broadly, federal spending patterns are heavily biased toward other jurisdictions in ways that are quite unrelated to operational issues. For example, the federal government spends about $10,000 per capita in P.E.I. and about $4,000 per capita in Ontario.

The financial consequences of these are serious. Ontario experiences a large fiscal gap (in 2005, approximately $23 billion) between the amount the federal government collects in Ontario and what it spends. This was approximately $1,900.00 for every person in the province.

The consequences for the lives of citizens in Ontario are just as bad.

The system operates in a way which is the exact opposite of the way most think it operates.

Rather than subsidizing poorer provinces to bring them up to common standards, it has subsidized them to the extent that key public services are more accessible to the public in the receiving provinces than in Alberta and Ontario, the key contributors to the system.

What you might say? Is that possible?

Here are some of the figures:

– In 2005, Ontario had 2.8 hospital beds per thousand and Alberta 3.30. Newfoundland and abrador on the other hand had 4.35 and Manitoba 3.82.

– Ontario had 1.76 physicians per 1,000 of population while Manitoba had 1.79 and Newfoundland 1.93. Alberta in this case is higher than the recipient jurisdictions with 1.88 physicians per 1,000.

– Newfoundland and Manitoba had 10.7 and 9.6 nurses per 1,000 respectively. Alberta had 8 and Ontario 7.1. Ontario, to put it simply, had a nursing work force about two thirds the size, in relation to population, of some receiving provinces.

– average class sizes in elementary and secondary schools are 13.4 for Newfoundland and 14.9 in Manitoba. For Ontario and Alberta, the figures are 16.6 and 17.9.

– Ontario has only about half the number of judges, in relation to population, as Newfoundland and has by far the fewest of all provinces. Newfoundland has a judge for every 10,000 people while Ontario has one for every 20,000. Both Manitoba and Alberta fall within this range with Manitoba having slightly more than Alberta in relation to population.

– data on long term care is much harder to come by. However, a few years ago, the number of hours per day that could be devoted to each resident of a nursing home in Ontario was almost certainly the lowest of all provinces at 2.5 hours per resident. A U.S. comparison may be useful here: a few years ago Ontario could allocate 2.5 hours per day per resident. Missisipi, by contrast, allocated more than 4

.

– In case you think I’m being selective in the figures I’m using, here are the numbers for total public sector employment including transfer partners per 1,000 population in the four provinces I’ve been using to make comparisons. Newfoundland, 105; Manitoba, 117; Alberta, 83 and Ontario, 81.

For general information, Quebec has 92 public sector employees per 1000 population. The outlier on the high side is Saskatchewan, with 121 public sector employees per 1,000.

Because we do not have program comparability numbers across Canada, these figures are probably the best indicators of the extent to which government programs at all levels in Ontario and Alberta are less accessible than they are in all receiving provinces.

They are dramatically less accessible and I’ve cited only a few of the facts that demonstrate that.

All the statistical evidence we have points to that conclusion.

B. Why is the gap dangerous?

– It is huge as a share of output. At 3.5% of provincial output, it is a burden similar to the burden Americans carry for defence.

U.S. defence outlays are 4.3% of U.S. GNP in 2007. They have jumped sharply in recent years due to the war in Iraq. Before that war, U.S. Defence expenditures were smaller, as a share of total output, than the interregional subsidy system was as a share of Ontario’s output.

– The system is not clearly visible for public examination and debate because much of it is built into routine federal programs.

– The moral legitimacy of public policy is undermined. Recipient jurisdictions in most cases have more funds available to them in relation to their populations than Ontario. In 2004-05, for example, Ontario’s effective real revenues per capita were $6,992 compared with Newfoundland at $7,449, Manitoba at $7,805, Quebec at $7,456 and P.E.I. at $8,764.

Those with the least in terms of collective resources should not be subsidizing those with much more.

– The system guarantees perpetual dependence in most recipient jurisdictions.

The funds involved are being used to create bigger and better paid bureaucracies, a circumstance which ensures perpetual dependency. Large bureaucracies do not generate enduring growth and competitiveness.

In this context, government sector expenditure as a percentage of output in 2004 in Ontario was 32%. In Nova Scotia it was 52%, Quebec 44%, Manitoba 46% and Alberta 23.1%.

– The system encourages leaders in some other provinces to stir up local resentments against other regions and generally to behave badly.

From 2001 to 2006, Ontario’s Gross Domestic Product per capita grew on average 1.1% each year. Saskatchewan grew on average by 2.4% over the same period. Yet its Premier has been vociferous in “fighting for Saskatchewan” by seeking additional equalization, nearly half of which would come from Ontario taxpayers.

– The same distasteful behaviour is evident in relation to the Premier of Newfoundland. Two years ago, he noted, in a speech to the Empire Club in Toronto, that Newfoundland entered Confederation with a surplus and implied that Canada was a cause of the deficits and debt problems that subsequently developed.

He did not advise that one of the principal reasons for the original surplus was the building of three military bases in Newfoundland during the Second World War by Canada, then a foreign country.

He also did not mention that Newfoundland in 1949 was under the direct supervision of the British Government due to disarray in its financial and economic affairs.

– The system means that other more positive approaches to growth in recipient jurisdiction in Canada have not been pursued. Over the past three decades, Ireland has become one of the fastest growing and wealthiest jurisdictions in the world by having low taxes, keeping public expenditure under control and avoiding direct subsidies to businesses.

The interregional subsidy system encourages recipient jurisdictions to do the exact opposite and they have done so.

– Canada’s competiveness overall has almost certainly been affected. Productivity in all recipient jurisdictions (Quebec, Manitoba, the Atlantic Provinces) is much lower than Ontario and well below the Canadian average.

While it cannot be said that the subsidy system caused this directly, it is evident that the interregional subsidy system has not helped lift productivity in underperforming (and recipient) jurisdictions and for this reason is a major contributor to our worsening international performance.

C. Why is the policy behind these programs so bad?

– Neither the federal nor the Ontario government have used the tools of economic analysis to simulate the impact of this system on Ontario, the principal contributing jurisdiction. As a consequence, political leaders and the public in Ontario are uninformed about the consequences for growth, investment, consumer spending, productivity and, most importantly, sustainability.

– No standards on the accessibility and quality of the programs funded by this system in provinces are in place to assess program comparability across Canada.

Comparability is the goal of the equalization program but amazingly, it is not measured.

– The system is so complex in its workings that very few people actually understand it.

– Nobody is really accountable in the normal way. The federal government routinely uses what it calls its spending power authority to intrude in areas of provincial jurisdiction described in the Constitution Act.

This means that most areas of our national life become equalized in one way or another and that both governments are responsible to the electorate for the same thing.

When everybody is accountable, nobody is.

The Organization for Economic Development (OECD), the world’s major economic research organization, has drawn our attention to this problem.

It indicated that “ this approach (spending agreements between governments in areas of provincial jurisdiction) dilutes the accountability for results. In effect, it creates an incentive for provinces and territories to negotiate more transfers …rather than take the larger but probably more difficult steps toward improving their economic performance”.

– On a day to day basis, the country operates in a way that is very different from its written constitution relating to which level of government is responsible for what, a problem with serious long term consequences.

It seems more than passing strange that the constitutional propriety of a particular program is determined by the level of government that has the money to pay for it.

Why have a written constitution when we routinely ignore some of its most important provisions?

– Naivety by Ontario. In the recent T.V election debate, leaders talked about Ontario’s past leadership in the federation.

They did not mention that Ontario’s leadership in the i960s and 1970’s was largely bought by federal regional subsidies, mainly from Ontario taxpayers, that caused political leaders in other provinces to laugh all the way to the bank as they accepted Ontario’s leadership.

I remember the laughing: I was there.

Who wouldn’t accept its leadership if Ontario was paying the freight?

Ontario’s leadership was rarely leadership by ideas.

Leadership brought by money has gained the province no goodwill elsewhere, as most citizens of Ontario find when they travel in the rest of Canada.

It should be noted that some thoughtful observers and researchers in recipient jurisdictions view the tide of unthinking Ontario and Alberta money coming to them as a silent killer of economic opportunity in those jurisdictions.

– Ontario made no effort to understand and report to the public on the actual impact of the transfer system in the recipient jurisdictions.

Until Mr. McGuinty acted in 2004, Ontario’s Premiers do not seem to have noticed that the recipients in the transfer system had better access to programming than the citizens of the principal contributing province.

It was left to the Atlantic Institute for Market Studies to report publicly that the money from regional subsidies was being wasted on excessive and excessively paid bureaucracies.

It was dedicated researchers and think tanks such as the Frontier Center for Public Policy here in Winnipeg that reported on the extent to which the transfer system was actually destroying economic development in recipient jurisdictions rather than helping it.

The Ontario government was notably silent on all of these serious issues. So also was the Alberta government.

D. What specific changes should be made?

– Ontario and Alberta should stop acquiescing in federal spending and operations in areas of provincial jurisdiction.

Every time the federal government acts in areas unintended by the framers of our constitution, the risks of extending unfair subsidies into the new areas are serious and, moreover, Ontario will pay $1.05 and up for every dollar it gains. Alberta will pay much more than that.

In the past, Ontario’ citizens and governments have been the enablers of expanded federal power because they felt it would assist in building Canada.

The factual evidence from many sources is now clear. It doesn’t help build Canada at all. In fact, for the reasons I’ve mentioned, it weakens our country.

– Ontario and Alberta should strongly support the limited efforts the current government has made to address the issues noted earlier and encourage it to do more.

Since taking office, the federal government has taken some steps (tax reductions and per capita transfers) which assist with the problems I’ve summarized and taken others – increased equalization is one – that worsen them.

The balance is a relatively minor improvement but an improvement nevertheless.

Mr. Harper’s position in refusing Newfoundland’s outrageous demands is a very principled approach and the recent federal budget gave some signs that the constitutional issue I mentioned earlier is a matter the government wishes to address.

So, in a very limited way, did the recent Throne Speech.

It is very important that Ontario and Alberta voters recognize this break with the patterns of the past because if the limited steps taken by the government have no traction, particularly in Ontario, they will not be repeated.

The wall of indifference Ontario voters – and sometimes. I think, Albertans – have shown in the past on transfers and subsidies paid by provincial taxpayers to others is a recipe for more in the future.

– The Ontario Government should propose a mix of specific changes to the taxation and fiscal systems and sell them to all Canadians as a fair solution for many problems experienced by some or all provinces. Two that have particular value are: shifting the GST to provinces in return for abandoning transfers and arranging to assume some provincial public debt in return for the reduction or elimination of transfers.

Ontario has already suggested changing E.I. so that it treats all similarly situated Canadians the same, wherever they live.

The E.I. matter should be pursued vigorously, in the courts if necessary, because of the corrosive nature of the discrimination in place against vulnerable citizens in Ontario.

I should say, at this point, that if Ontario and Alberta collaborated, in some way, to sell these ideas to other Canadians and their governments, the chances for success would be much greater than either province could achieve on its own.

– The Ontario government should, on its own, put in place a system to compare provincial programming across Canada and use this to convince the Ontario public, in the first instance, but also all other Canadians, that Canada over equalizes.

It should do this unilaterally because there is no hope that a rigorous system to measure comparability could be negotiated with recipient provinces or the federal government.

– Finally, and perhaps most importantly, the Ontario government should undertake a full public education program on interregional subsidies and transfers, based on substantial research by independent third parties.

I think the Alberta government should do the same.

They should do this for the reason outlined in the preceding recommendation.

If public opinion is not better informed and if Ontario’s citizens – and perhaps Albertans – do not shed their indifference to one of the largest financial issues they face, the chance for timely change that could help Ontario build again and Alberta to respond to the huge challenges it faces is very slight.

Ontario’s future and the future of all Canadians will continue to be shadowed by this unprincipled and unproductive system.

I’d now like to make two comments that specifically relate to Manitoba.

The first is that the problem I’ve just summarised is not just a management issue. It is a matter of morality.

The government and people of Manitoba should not be asking neighbours with fewer fiscal resources to provide them with funding for services that are already more accessible than those available to the neighbours from whom the funds are being sought.

We can see from our own personal lives how unreasonable that is.

The second issue is a matter of risk management.

You can be quite sure that blatant unfairness of the type I’ve described will not last and that when the people of Ontario and Alberta realize the extent to which they have been had by this system, they will seek to end it and if they collaborate they will likely be successful.

While there is little doubt that in the medium and long term Manitoba will be much better off without subsidies from others, change in the short term would be very disruptive.

From this point of view, it would be far better if Manitoba started immediately to reduce its need for external funds by reducing its public sector to the scale evident in Ontario and Alberta and by eliminating unwise subsidies.

In passing, I should say that unwise is a serious understatement when one considers the scale by which Manitoba subsidizes electricity.

Subsidizing energy consumption in Al Gore’s world is nuts.

Subsidizing it because subsidies from others enable the province to do so is beyond being nutty. It’s crazy.

I’d like to conclude with a suggestion for each of you.

If you agree with some of what I’ve said, get involved. Speak to your M.P. and your member of the provincial legislature.

Enlist friends.

If we can get constructive changes made, the lives of all Canadians will be better in the future. And we will be more united, not less, because there will be no payoff for the voices of stridency and discord as there is at present.

Thank you for the opportunity to be here today.

It was a great pleasure to be here more than ten years after my last visit.